The ESG Premium: Investigating the Role of ESG Difference and Momentum in M&A Valuation

Abstract

This thesis investigates how ESG Difference and ESG Momentum influence M&A deal premiums, providing insights into the pre-merger financial implications of sustainability factors in corporate transactions. Using a sample of 158 and 304 transactions, for ESG Difference and ESG Momentum respectively, from 2003 to 2024, multivariate OLS regression models were applied to measure the relationship between ESG variables and deal premiums. The results indicate that larger ESG Difference, particularly environmental differences, have a negative effect on deal premiums, suggesting that larger difference between target and acquirer is perceived as a misalignment risk. In contrast, long-term ESG Momentum is positively associated with higher deal premiums, whereas short-term ESG Momentum had no effect. This indicates that ESG Momentum is only considered by acquirers when it is sustained over longer periods, as it implies a target’s deliberate strategy rather than superficial changes. These findings contribute to the literature by highlighting the importance of relative ESG differences and trajectory in M&A deal valuations.